Recently, the Indian Supreme Court in a decision penned by Chief Justice Dr. Chandrachud in a matter relating to laying of power lines endangering the lives of Godavan or Greater Indian Bustard has for the very first time recognised adverse impact of climate change impeding the constitutional guarantee of the right to equality (Article 14) and life (Article 21). Climate Change is not only affecting constitutional guarantees but is creating ripples in the insolvency and bankruptcy ecosystem. The revolutionary, Insolvency and Bankruptcy Code,2016 which put creditors in the driving seat, sprinted India’s rank in the World Bank Group’s Ease of Doing Business Index from 136 to 52 in terms of resolving insolvency. In 2021, BEE or Business Enabling Environment, an approach used by the World Bank to measure the business and investment climate worldwide replaced the EoDB index. BEE details how environmental obligations affect Insolvency Resolution, putting in focus the debtor’s ability to fulfill environmental liabilities.
Consider the case of Pacific Gas and Electric Company (PG&E) in California, USA. After being held accountable for the 2018 wildfires, which claimed 86 lives and destroyed thousands of homes, PG&E faced an onslaught of over 750 lawsuits demanding $30 billion. The crisis forced the energy giant into bankruptcy in 2019. It emerged with a restructured board and substantial compensation of $5.4 billion in cash along with 22.19% stock into a trust for victims of wildfires. This showcases how environmental liabilities can push corporate giants to the brink of bankruptcy.
In India, the aftermath of the Bhopal Gas Tragedy led to the enactment of the Public Liability Insurance Act of 1991, requiring companies dealing with hazardous chemicals to carry compulsory insurance. This created an alternative forum for victims to claim compensation. Typically, compensation under the PLI Act is low and the polluting/offending companies can use bankruptcy route to reduce their liabilities like PG&E. However, the courts will not shy from lifting corporate veil or enquiring into the director’s liability, thus making corporate accountability far more stringent. The UK Supreme Court in 2022 decision in Sequana, held the directors had a responsibility to the creditors of the company even before insolvency was initiated if they knew insolvency would likely be initiated.
Typically, the companies underfund the subsidiary overload the subsidiary with environmental liability, and then file bankruptcy to get the subsidiary declared insolvent, get it liquidated, and thus cease the environmental liability. It is worth noting that the IBC has specific provisions for looking back at the transactions and canceling fraudulent or malicious transactions, thus keeping Damocles’s sword hanging.
Coming back to our Godavan- one of the heaviest avian bird, has already created ripples in the insolvency and renewable energy sector. Indian Supreme Court in 2021 mandated renewable energy companies to install bird diverters along the entire 80,000 sq km stretch of potential and priority area. Resultantly, the cost escalated. The matter reached sector regulator CERC- the Central Electricity Regulatory Commission. The CERC took this as “change in law” and directed the Solar Energy Corporation of India (SECI) to compensate the renewable companies. As a respite and balancing environment and sustainable development, Supreme Court modified its earlier order of installing bird diverts in the entire priority and potential area of 80,000 square kilometres to only priority area of 3,163 Sq Km. The impact of this uncertainty is not limited to the renewable companies but to the nation as well, only 44% of the target could be achieved.
The broader implications for businesses are profound. Climate change, a force that endangers diverse ecosystems, also amplifies solvency risks, making it a pressing issue for corporate governance. To keep our companies afloat we need to seriously mitigate climate change. We have to look into mitigation measures not only for the survival of lives but also for livelihoods. As climate change presents a real threat to ecosystems and habitats, it poses a domino threat to the survival of businesses as solvency risk gets exacerbated. One of the key tasks for the incoming government is to mitigate climate change risks and make the business environment more conducive and predictable for the growth of the nation.
Looking ahead, the onus is on both the government and businesses to integrate climate considerations into their strategic planning. For India, adapting the Insolvency and Bankruptcy Code to address environmental concerns better could provide clearer guidelines for companies grappling with these dual imperatives. As we move forward, the intersection of environmental stewardship and economic viability will increasingly dictate business strategies and national policies. Mitigating climate risks and fostering a resilient business environment are no longer optional but essential for sustainable development and the preservation of both livelihoods and lives.
Dr Charu Mathur is an Advocate-on-Record of the Supreme Court of India.